No. 3 Sung-Shou Road, Taipei, Taiwan, R.O.C. TELEPHONE NUMBER:

Transcription

1 CHINATRUST FINANCIAL HOLDING COMPANY, LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 and 2004 AND INDEPENDENT AUDITORS REPORT ADDRESS: No. 3 Sung-Shou Road, Taipei, Taiwan, R.O.C. TELEPHONE NUMBER:

2 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Contents Page. Cover Page 1. Table of Contents 2. Independent Auditors Report 3. Consolidated Balance Sheets 4. Consolidated Statements of Income 5. Consolidated Statements of Change in Stockholders Equity 6. Consolidated Statements of Cash Flows 7. Notes to Consolidated Financial Statements 1. Basis of Presentation 8~13 2. Summary of Significant Accounting Policies 14~28 3. Reasons for and Effects of Accounting Changes Summary of Major Accounts 29~82 5. Related Party Transactions 83~90 6. Pledged Assets Significant Commitments and Contingencies Significant Catastrophic Losses Significant Subsequent Events Other

3 The Board of Directors Chinatrust Financial Holding Company, Ltd.: Independent Auditors Report We have audited the accompanying consolidated balance sheets of Chinatrust Financial Holding Company, Ltd. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chinatrust Financial Holding Company, Ltd. and subsidiaries as of December 31, 2005 and 2004, and the results of its operations and cash flows for the years then ended, in conformity with generally accepted accounting principles in the Republic of China. As described in Note 3, effective January 1, 2004, the Company s subsidiaries, Chinatrust Commercial Bank, Ltd. and Chinatrust Bills Finance Corp. adopted SFAS No. 33 Accounting for Transfers of Financial Assets and Extinguishments of Liabilities to account for bills and bonds sold under repurchase agreements in which control is not surrendered as financing transactions instead of as sale transactions. Taipei, Taiwan, ROC April 25, 2006 Notice to Readers The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures, and practices to audit such financial statements are those generally accepted and applied in the Republic of China

4 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 AND 2004 (Expressed in Thousands of New Taiwan Dollars) December 31, ASSETS Amount % Amount % Cash and cash equivalents (Notes 2 and 4(a)) $ 55,869,408 3 $ 27,778,875 2 Due from Central Bank and call loans to banks (Notes 4(b) and 5) 132,201, ,816,427 6 Bills and securities purchased (Notes 2, 3, 4(c), 5 and 6) 284,387, ,738, Less: Allowance for market value decline (1,100,330) - (591,695) - 283,287, ,146, Receivables (Notes 2 and 4(d)) 176,322, ,556, Less: Allowance for credit losses (2,603,471) - (2,747,777) - 173,719, ,808, Loans (Notes 2, 4(e), and 5) 920,859, ,198, Less: Allowance for loan losses (11,012,303) (1) (12,511,972) (1) 909,846, ,686, Long-term investments (Notes 2, 4 (c), (f), (g) and 6) Accounted for under the equity method 2,149,746-2,115,417 - Accounted for under the cost method 16,902, ,116,718 1 Less: Allowance for market value decline (1,103,121) - (943,028) - Long-term bond investments 67,860, ,416,067 4 Real estate investments 1,400-1,400-85,810, ,706,574 5 Other financial assets (Notes 2, 4(h) and 6 ) 27,347, ,555,305 2 Premises and equipment (Notes 2, 4(i) and 6) Land and buildings, net 29,350, ,541,567 3 Equipment and other properties, net 5,187,610-5,461,156-34,537, ,002,723 3 Intangible assets (Notes 2, 4(j) and 10) 4,529,608-5,858,671 - Other assets (Notes 2, 4(k), 4(q) and 6) 9,464, ,618,495 1 TOTAL ASSETS $ 1,716,615, $ 1,428,979, LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Bills and bonds sold under repurchase agreements (Notes 2, 3, and 4(c)) $ 105,339,275 6 $ 112,366,519 8 Due to Central Bank and other banks 66,103, ,728,017 5 Payables (Notes 2 and 4(l)) 48,984, ,978,429 3 Deposits and remittances (Notes 4(m) and 5) 1,206,212, ,016,124, Financing from Central Bank and others (Note 4(n)) 17,046, ,969,611 1 Corporate bonds and financial debentures (Notes 2 and 4(o)) 108,702, ,682,437 4 Other liabilities (Notes 2 and 4(p)) 18,571, ,204,370 1 Total liabilities 1,570,959, ,328,053, Stockholders' equity Capital stock Common stock (Note 4(s)) 70,907, ,798,995 4 Preferred stock (Note 4(s)) 10,000, ,500,000 - Capital surplus (Note 4(s)) 46,921, ,774,389 2 Retained earnings (Note 4(s)) Legal reserve 2,899,400-1,429,334 - Special reserve 1,508, ,362 - Undistributed retained earnings 16,134, ,874,762 1 Other adjustments to stockholders' equity: (Notes 2 and 4(g)) Unrealized losses on long-term equity investments (1,103,120) - (943,028) - Cumulative translation adjustments (1,397,698) - (2,040,140) - Treasury stock common stock (Notes 2 and 4(t)) (273,326) - (1,663,306) - Subtotal Stockholders' Equity for Parent Company 145,597, ,872,368 7 Minority interest 57,829-53,051 - Total Stockholders' Equity 145,655, ,925,419 7 Commitments and contingencies (Notes 2 and 7) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,716,615, $ 1,428,979, The accompanying notes are an integral part of the financial statements

5 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Expressed in Thousands of New Taiwan Dollars, Except for EPS) For The Years Ended December 31, Amount % Amount % Operating Revenues: Interest income $ 60,301, $ 48,882, Commissions and fees income 20,139, ,904, Net gains on bills and securities purchased 1,525, ,214,113 2 Investment income accounted for under the equity method, net (Notes 2 and 4(f)) ,118 - Net gains on derivative instruments 4,190, ,006,299 5 Net gains on foreign exchange 785, ,358,281 2 Other operating revenues 835, ,667,082 2 Total Operating Revenues 87,778, ,286, Operating Costs: Interest expense (19,854,618) (23) (13,912,393) (18) Fees paid (526,302) (1) (415,043) (1) Investment loss accounted for under the equity method, net (Notes 2 and 4(f)) (1,085) Provisions for allowances and reserves (14,653,406) (16) (11,530,641) (15) Other operating costs (740,426) (1) (724,960) (1) Total Operating Costs (35,775,837) (41) (26,583,037) (35) Gross Margin 52,002, ,703, Operating Expenses (Note 10) (30,445,501) (35) (28,979,819) (38) Operating Taxes (1,358,533) (1) (1,201,222) (2) Operating Income 20,198, ,522, Non-Operating Revenues 884, ,068 1 Non-Operating Expenses (541,499) (1) (300,053) - Income Before Income Tax 20,541, ,059, Income Tax Expense (Notes 2 and 4(q)) (4,416,996) (5) (4,669,844) (6) Consolidated Gross Income 16,124, ,389, Classified as: Stockholders of Parent Company (Consolidated Net Income) 16,120, ,385, Minority interest income 4,169-3,484 - $ 16,124, $ 15,389, Before After Before After Earnings per share (EPS) (Notes 2 and 4(u)) income tax income tax income tax income tax Basic EPS $ 2.83 $ 2.20 $ 3.42 $ 2.60 Basic EPS retroactively adjusted $ 2.85 $ 2.17 Diluted EPS $ 2.73 $ 2.12 $ 3.26 $ 2.47 Diluted EPS retroactively adjusted $ 2.72 $ 2.06 Pro forma data assuming Company shares held by subsidiaries not considered as treasury stock: Consolidated Net Income $ 16,120,275 $ 15,385,736 Bofore After Before After income tax income tax income tax income tax Basic EPS $ 2.82 $ 2.20 $ 3.35 $ 2.54 Diluted EPS $ 2.72 $ 2.12 $ 3.19 $ 2.42 The accompanying notes are an integral part of the financial statements

6 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Expressed in Thousands of New Taiwan Dollars) Capital stock Retained earnings Other adjustments for stockholders' equity Unrealized losses on long-term equity Common stock Preferred stock Capital surplus Legal reserve Special reserve Undistributed retained earnings investments adjustments Treasury stock common stock Treasury stock preferred stock Minority Interest Total Beginning Balance January 1, 2004 $ 54,962,000 $ 12,655,429 $ 32,089,783 $ 657,724 $ 110,852 $ 7,746,609 $ (970,608) $ (819,365) $ (4,445,558) $ (8,037,316) $ 54,214 $ 94,003,764 Appropriation and distribution of 2003 earnings Legal reserve ,610 - (771,610) Special reserve ,510 (30,510) Employee bonuses (3,161) (3,161) Remuneration to directors and supervisors (252,878) (252,878) Cash dividends common stock (5,891,810) (5,891,810) Dividends preferred stock (622,540) (622,540) Capitalization of capital surplus 3,213,715 - (3,213,715) Convertible Bonds transfer into common stocks 18,960-43, ,217 Recognition of capital surplus of subsidiaries Recognition of cumulative translation adjustment of subsidiaries (1,465,079) (1,465,079) Recognition of unrealized losses on long-term equity investments of subsidiaries , ,580 Recognition of undistributed retained earnings of subsidiaries (475,903) (475,903) Recognition of treasury stock of subsidiaries ,876, ,876,309 Disposal of treasury stock (58,895) , ,595 Redemption of treasury stock (2,118,113) - (2,118,113) Retired of treasury stock preferred stock (Note 4(s)) - (10,155,429) ,155, Retired of treasury stock common stock (Note 4(t)) (395,680) - (145,497) - - (150,276) , Effect of hedging against fluctuations in exchange rates of foreign investments , ,304 Change in minority interest (1,163) (1,163) Net income for the year ended December 31, ,385, ,385,736 Ending Balance December 31, 2004 $ 57,798,995 $ 2,500,000 $ 28,774,389 $ 1,429,334 $ 141,362 $ 14,874,762 $ (943,028) $ (2,040,140) $ (1,663,306) $ - $ 53,051 $ 100,925,419 Appropriation and distribution of 2004 earnings Legal reserve ,470,066 - (1,470,066) Special reserve ,367,296 (1,367,296) Employee bonuses (5,713) (5,713) Remuneration to directors and supervisors (457,016) (457,016) Cash dividends common stock (5,888,054) (5,888,054) Stock dividends common stock 4,710, (4,710,443) Dividends preferred stock (612,000) (612,000) Capitalization of capital surplus 7,065,665 - (7,065,665) Convertible Bonds transfer into common stocks 1,332,386-2,735, ,067,765 Issuance of preferred stock Class B (Note 4(s)) - 7,500,000 22,500, ,000,000 Recognition of capital surplus of subsidiaries - - (23,076) (23,076) Recognition of cumulative translation adjustment of subsidiaries , ,044 Recognition of unrealized losses on long-term equity investments (160,092) (160,092) Recognition of undistributed retained earnings of subsidiaries (319,839) (319,839) Recognition of treasury stock of subsidiaries ,320, ,320,724 Disposal of treasury stock (29,770) , ,486 Effect of hedging against fluctuations in exchange rates of foreign investments (117,602) (117,602) Change in minority interest ,778 4,778 Net income for the year ended December 31, ,120, ,120,275 Ending Balance December 31, 2005 $ 70,907,489 $ 10,000,000 $ 46,921,027 $ 2,899,400 $ 1,508,658 $ 16,134,840 $ (1,103,120) $ (1,397,698) $ (273,326) $ - $ 57,829 $ 145,655,099 Cumulative translation The accompanying notes are an integral part of the financial statements

7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Expressed in Thousands of New Taiwan Dollars) For the years ended December Cash flows from operating activities: Consolidated net income $ 16,120,275 $ 15,385,736 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Minority interest income 4,169 3,484 Depreciation and amortization 3,984,506 3,657,122 Investment income accounted for under the equity method - (253,118) Investment loss accounted for under the equity method 1,085 - Cash dividends received from subsidiaries accounted for under the equity method 148, ,598 Redemption premium on convertible bonds and exchange gain or loss 501,677 21,737 Amortization of premium and discount in long-term bond investments 301, ,790 Losses on dispositions of long-term investments (including permanent impairment loss) 133, ,556 Gain on financial assets securitization (43,935) (50,288) (Gains) losses on dispositions of premises, equipment and foreclosed properties (42,502) 580,333 Losses on obsolescence of premises and equipment 92,612 88,715 Provision for loan losses 17,327,797 13,881,242 Provision for (reversal of) unrealized losses on bills and securities purchased 508,635 (440,225) Provision for loss on asset-backed securities 2,424 - Reversal of miscellaneous reserves (98,256) (74,687) Provision for (reversal of) unrealized losses on foreclosed properties 91,753 (247,416) Gain on issuance and repurchase of stock warrants net (419,204) (531,102) Others (1,547) (56,203) Net changes in: Receivables (3,857,291) 8,087,750 Bills and securities purchased (44,200,479) (68,777,133) Payables 4,244, ,960 Trading derivative instruments, net (1,563,723) 1,742,845 Net cash used in operating activities (6,763,209) (25,938,304) Cash flows from investing activities: Increase in due from Central Bank and call loans to banks (excluding cash equivalents) (32,153,331) (7,747,578) Increase in receivables (33,290,049) (28,370,446) Increase in loans (120,940,037) (131,920,594) Purchase of long-term investments (37,130,022) (15,700,426) Capital return on long term bond investments 9,174,332 6,421,702 Proceeds from disposition of long-term investments 18,578,247 11,828,858 Proceeds from financial assets securitization 17,596,003 4,855,000 Proceeds from disposition of premises, equipment and foreclosed properties 2,863,623 1,880,377 Purchase of premises and equipment (3,366,608) (2,205,270) Increase in other financial assets (3,237,292) (3,148,898) (Increase) decrease in other assets (404,417) 149,268 Non-trading derivative instruments, net (371,449) (3,447) Cash received from acquisition of Feng-Shan Credit Cooperative, net - 2,946,370 Net cash used in investing activities (182,681,000) (161,015,084) Cash flows from financing activities: (Decrease) increase in bills and bonds sold under repurchase agreements (7,027,244) 108,167,976 Issuance of corporate bonds and financial debentures 50,413,459 5,500,000 Decrease in due to Central Bank and other banks (8,624,858) (1,900,746) Increase in payables 11,803,022 4,024,967 Increase in deposits and remittances 190,088,011 80,126,814 Increase (decrease) in financing from Central Bank and others 4,076,815 (516,070) Increase in other liabilities 2,178,126 3,864,762 Issuance of preferred stocks Class B 30,000,000 - Remuneration to directors and supervisors (457,016) (252,878) Employee bonuses (11,599) (30,454) Cash dividends preferred stock (612,000) (622,540) Cash dividends common stock (5,888,139) (5,892,152) Disposal of treasury stock 1,040,371 1,549,981 Redemption of treasury stock - (2,118,113) Decrease in minority interest - (31) Net cash provided by financing activities 266,978, ,901,516 Effect of exchange rate changes 270,111 (421,827) Net increase in cash and cash equivalents 77,804,850 4,526,301 Cash and cash equivalents, at beginning of the year 81,559,159 77,032,858 Cash and cash equivalents, at end of the year $ 159,364,009 $ 81,559,159 Cash and cash equivalents (Note 2): Cash $ 55,869,408 $ 27,778,875 Call loans to banks 27,618,079 18,609,281 Due from Central Bank 15,549,604 14,326,524 Bills and securities purchased (cash equivalents) 60,326,918 20,844,479 $ 159,364,009 $ 81,559,159 Supplemental disclosures of cash flows information: Cash paid during the period for: Interest $ 18,281,129 $ 13,070,775 Income taxes $ 4,224,886 $ 1,763,390 Investing and financing activities not affecting cash flows: Long-term investments reclassified under short-term investments $ 91,720 $ - Short-term investments reclassified under long-term investments $ 571,252 $ - Employee bonuses $ 2 $ - Stock dividends Common stock $ 4,710,443 $ - Captialization of capital surplus $ 7,065,665 $ - Convertible Bonds convert into common stocks $ 4,067,766 $ 62,521 The accompanying notes are an integral part of the financial statements

8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2005 AND 2004 (New Taiwan Dollars in Thousands, Unless Otherwise stated) 1. Basis of Presentation Chinatrust Financial Holding Company, Ltd. (the Company ) was established on May 17, 2002 through a stock conversion (conversion ratio: one to one) with Chinatrust Commercial Bank Co., Ltd. On the same date, after approval from the Securities & Futures Bureau (the SFB ) under the Ministry of Finance (the MOF ) the shares of the Company started to trade publicly, while shares of the Chinatrust Commercial Bank Co., Ltd. were delisted. The Company conducts business in the following areas: (a) The Company has been approved to invest in the following businesses: (i) (ii) Banking. Bills financing. (iii) Credit cards. (iv) Trusts. (v) Insurance. (vi) Securities. (vii) Futures. (viii) Venture capital. (ix) Investments in overseas financial institutions as approved by the MOF. (x) Other related financing as approved by the MOF. (xi) Other related investments. (b) (c) (d) Management of above businesses. Investments in businesses other than the ones listed in item (a) as approved by the MOF. Other related businesses as approved by the MOF. As of December 31, 2005, the Company had 26 employees. As of December 31, 2005, the Company and its consolidated subsidiaries had 9,268 employees

9 Details of subsidiaries within the consolidated entity are shown below: Name of Investor Company The Company Name of Subsidiary Chinatrust Commercial Bank Co., Ltd. Primary Business Primarily engages in the commercial banking and financing business Shareholding Percentage Description Dec 31, 05 Dec 31, % % As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. amounted to $51,771,935 for common stock. As of December 31, 2005, the Company acquired 100% equity ownership of this subsidiary. Chinatrust Securities Corp., Ltd. Chinatrust Insurance Brokers Corp., Ltd. Chinatrust Venture Capital Corp., Ltd. Chinatrust Asset Management Co., Ltd. Primarily engages in the securities and futures business Primarily engages in the property insurance and life insurance brokerage Primarily engages in the venture capital business Primarily engages in the asset management business 99.66% 99.66% As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Securities Corp., Ltd. amounted to $5,000,000; representing 500,000 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company held 498,288 thousand shares or 99.66% equity ownership in this subsidiary % % As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Insurance Brokers Corp., Ltd. amounted to $1,396,795; representing 139,679 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company held 139,679 thousand shares or 100% equity ownership in this subsidiary % % As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Venture Capital Corp., Ltd. amounted to $2,000,000; representing 200,000 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company held 200,000 thousand shares or 100% ownership in this subsidiary % % As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Asset Management Co., Ltd. amounted to $20,000,000; representing 2,000,000 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company held 2,000,000 thousand shares or 100% equity ownership in this subsidiary

10 Name of Investor Company The Company Name of Subsidiary Chinatrust Bills Finance Corp. Primary Business Primarily engages in proprietary trading, brokerage of short-term bills, underwriting, certification, guarantee and endorsement of commercial paper Shareholding Percentage Description Dec 31, 05 Dec 31, % % As of December 31, 2005, the issued capital of the Company s subsidiary, Chinatrust Bills Finance Corp. amounted to $4,080,000, representing 408,000 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company held 408,000 thousand shares or 100% equity ownership in this subsidiary. Chinatrust Commercial Bank Co., Ltd. Chinatrust (Philippines) Commercial Bank Corporation Primarily engages in commercial banking and financing business 99.41% 99.41% As of December 31, 2005, the issued capital of Chinatrust (Philippines) Commercial Bank Corporation, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to 1,875,000 thousand Philippine pesos, representing 187,500 thousand common shares with par value of 10 Philippines pesos per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. held 186,386 thousand shares or 99.41% equity ownership in this Philippine bank. PT Bank Chinatrust Indonesia CTC Bank of Canada Primarily engages in commercial banking and financing business Primarily engages in commercial banking and financing business 99.00% 99.00% As of December 31, 2005, the issued capital of PT Bank Chinatrust Indonesia, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to Rupiah 150,000,000 thousand, representing 1,500 common shares with par value of Rupiah 100,000 thousand per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. held 1,485 shares or 99.00% equity ownership in this Indonesian bank % % As of December 31, 2005, the issued capital of CTC Bank of Canada, a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to CAD15,000 thousand, representing 1,500 thousand common shares with par value of CAD10 (in dollars) per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. held 1,500 thousand shares or 100% equity ownership in this Canadian bank

11 Name of Investor Company Chinatrust Commercial Bank Co., Ltd. Name of Subsidiary Chinatrust Capital Corp. (original named China Trust Holdings Corp.) Primary Business Primarily engages in securities investment business Shareholding Percentage Description Dec 31, 05 Dec 31, % % As of December 31, 2005, the issued capital of Chinatrust Capital Corp. (Original named China Trust Holdings Corp.) a subsidiary of Chinatrust Commercial Bank Co., Ltd. amounted to USD1,336 (in dollars), representing 1,336 common shares with par value of USD1 (in dollars) per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Commercial Bank Co., Ltd. held 1,336 shares or 100% equity ownership. Chinatrust Capital Corp. (original named China Trust Holdings Corp.) Chinatrust Asset Management Co., Ltd. Chinatrust Bank (U.S.A.) CT Opportunity Investment Company Primarily engages in commercial banking and financing business Primarily engages in securities investment business % % As of December 31, 2005, the issued capital of this US bank amounted to USD500 thousand for preferred stock and USD100 thousand for common stock. As of December 31, 2005, the equity ownership by the Company s sub-subsidiary, Chinatrust Capital Corp. (original named China Trust Holdings Corp.) was 100% in this US bank % % As of December 31, 2005, the issued capital of CT Opportunity Investment Company amounted to USD36,301 (in dollars), representing 36,301 common shares with par value of USD1 (in dollars) per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Asset Management Co., Ltd. held 36,301 shares or 100% equity ownership in this company. Chung Shin-1 Asset Management Co., Ltd. Primarily engages in the asset management business % % As of December 31, 2005, the issued capital of Chung Shin-1 Asset Management Co., Ltd. amounted to $1,300,000, representing 130,000 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Asset Management Co., Ltd. held 130,000 thousand shares or 100% equity ownership in this company

12 Name of Investor Company Chinatrust Asset Management Co., Ltd. Name of Subsidiary Tuo Yu Asset Management Servicing Co., Ltd. Primary Business Primarily engages in the asset management business Shareholding Percentage Description Dec 31, 05 Dec 31, % % As of December 31, 2005, the issued capital of Tuo Yu Asset Management Servicing Co., Ltd. amounted to $5,000, representing 500 thousand common shares with par value of $10 New Taiwan Dollars per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Asset Management Co., Ltd. held 500 thousand shares or 100% equity ownership in this company. Chinatrust Securities Corp., Ltd. CTCB (Mauritius) Holding Company Ltd. Primarily engages in securities investment business % % As of December 31, 2005, the issued capital of CTCB (Mauritius) Holding Company Ltd. amounted to USD11,113 thousand, representing 11,113 thousand common shares with par value of USD1 (in dollars) per share. As of December 31, 2005, the Company s subsidiary, Chinatrust Securities Corp., Ltd. held 11,113 thousand shares or 100% equity ownership in this company. CTCB (Mauritius) Holding Company Ltd. Chinatrust Secuirities (Hong Kong) Limited Primarily engages in securities business % % As of December 31, 2005, the issued capital of Chinatrust Secuirities (Hong Kong) Limited to HKD 86,679 thousand, representing 86,679 thousand common shares with par value of HKD 1 (in dollars) per share. As of December 31, 2005, the Company s sub-subsidiary CTCB (Mauritius) Holding Company Ltd. held 100% equity ownership in this company

13 The majority-owned investees of the Company have been consolidated except for those shown below: Name of Investee Company Primary business Ownership Chinatrust Forex Corp. Foreign exchange All shares were held by brokerage the Chinatrust Commercial Bank Co., Ltd. and Chinatrust (Philippines) Commercial Bank Corporation Reason for not consolidating The company went into liquidation. Therefore, are not consolidated with the consolidate entity. Chinatrust Securities Investment Consultancy Corp., Ltd. Securities investment and consultancy services 99.40% The total assets and operating revenue of this investee company are insignificant. Therefore are not consolidated with the consolidate entity. GCB Finance (HK) Limited Corporate loans 100% Chinatrust Security Co., Ltd. Protection, Fire and Life Safety Services 100% Taipei Arena Co., Ltd. Entertainment services 50.00% The number of Board of Directors and supervisors are not greater than half, therefore no control ability. (The company went into liquidation)

14 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company s financial statements were prepared in accordance with generally accepted accounting principles of the Republic of China. The significant accounting policies and bases of measurement adopted in preparing these financial statements are summarized as follows: (a) Cash and Cash Equivalents Compilation of statements of cash flows is based upon cash and cash equivalents. Cash includes cash in vault, savings accounts, checking accounts, unrestricted time deposits and negotiable certificates of deposits. Cash equivalents other than Chinatrust Commercial Bank Co., Ltd. consist of short-term and highly liquid investments that are readily convertible to known amounts of cash and will mature on short notice so that the interest rate fluctuations have little effect on their values. Cash equivalents include Treasury bills, commercial paper, and banker s acceptances with maturities within three months from investment date. (b) Accounts Receivable For the Company s banking subsidiaries, consumer loans to credit card holders are reflected by the amounts reported by merchants, excluding unearned interest. Interest thereon is recognized on an accrual basis using the interest method. Credit card loan or accrued interest that is over 150 days past due is reclassified to a non-accrual account. Interest collected thereafter is included in earnings only to the extent of cash actually received. The Company s banking subsidiaries engage in factoring and management of accounts receivable. The interest and transaction fees from factoring and management of such accounts are treated as current income. An allowance for credit losses is provided by reviewing the balance of accounts at period-end. Unpaid accounts receivables purchased from companies that sell receivables are accounted for under payables. (c) Loans Loans are carried at principal amounts outstanding, net of unearned income and amounts charged-off. Interest is recognized on an accrual basis using the interest method. Interest accrual is suspended under either of the following conditions: (i) collection of principal or interest accrued is considered highly unlikely; or (ii) principal or interest accrued is 180 days past due. Interest collected thereafter is included in earnings only to the extent of cash actually received

15 (d) Allowance for Credit Losses For the Company s banking subsidiary, Allowance for credit losses is a significant estimate regularly evaluated by management for adequacy and is provided through a charge to provision for credit losses. In accordance with the Regulation Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Non-performing and Non-accrued Loans issued by MOF, the management evaluates the quality of the overall portfolio, which comprises loans, accounts receivable, receivable-non-accrual accounts, outstanding guarantee, and a review of specific delinquent claims. The risk of overall claims is reviewed based on past experiences. For the Company s banking subsidiaries, non-accrual accounts deemed as uncollectible are written off upon approval of the Board of directors. (e) Bills and Securities Purchased Bills and securities purchased are carried at cost. Upon sale, cost is determined by the moving-average method. Closing balance will be valued at the lower of total cost or market value. In accordance with the regulations of the Securities & Futures Bureau ( SFB ), except for the Securities subsidiary, market values are determined by the average closing prices of the last month of the period. For the securities subsidiary, trading securities are valued at the lower of total cost or market except for Emerging Market securities, which are carried at cost at the end of an accounting period. Market value refers to the closing prices at the end of an accounting period. Government and corporate bonds are valued at the lower of total cost or market if market quotes are available; otherwise, bonds are carried at face value and adjusted by the accumulated unamortized discount or premium. Financial debentures, commercial paper, banker s acceptances, treasury bills and negotiable certificates of time deposits purchased are carried at cost. Overseas debt securities are valued at the lower of total cost or market value, and redeemable value is adopted if it is lower than market price. Loss due to market value decline or gain on recovery in market value arising from valuation of bills and securities at the lower of total cost or market value is classified as unrealized gain or loss on bills and securities. Gain on short-term notes transactions is accounted for as interest income. Bills and securities sold under repurchase agreements or restrictions should be disclosed

16 (f) Long-Term Investments Under the Interpretation Letter No. (90) 182 issued by the Accounting Research and Development Foundation of the Republic of China on October 29, 2001, when a financial holding company is established through conversion of shares of a financial institution, the invested capital acquired by the financial holding company is valued at the difference between the book value of their assets and liabilities. A portion of the investment acquired equal to par value of the shares issued is accounted for as capital stock and that portion exceeding par value is accounted for as capital surplus. Long-term equity investments are carried at cost. Investments in Listed and O.T.C. companies where the Company has equity ownership of less than 20% are valued at the lower of total cost or market value, and the unrealized loss from the decline in market value below cost is charged against stockholders equity. Investments in non-listed companies are carried at cost. If the impairment in the value of investment is other than temporary and the recovery of the carrying amount is deemed unlikely, loss on investment is recognized in the current period. Investees in which the Company has equity ownership of more than 20% or has significant influence are accounted for under the equity method according to R.O.C. Statement of Financial Accounting Standards ( SFAS No. 5. ). Upon sale, gain or loss on disposal of long-term equity investment is calculated based on the differences between selling price and the book value. The remaining capital surplus arising from a long-term equity investment is adjusted to profit and loss based on the percentage of sales. Prior to year 2004, the Company prepares consolidated financial statements every quarter for majority-owned affiliates, in accordance with the Financial Holding Company Law. However, consolidated statements are not prepared if the total assets and operating revenues of a subsidiary (excluding subsidiary banks and those required by the MOF) do not exceed 10% of the Company s respective accounts, and if the combined assets or operating revenues of all of these subsidiaries do not each exceed 30% of the Company's respective accounts. Commencing from the year 2005, the Company prepares consolidated financial statements that include the accounts of its majority-owned affiliates in accordance with amended SFAS No. 7 Consolidated Financial Statements. Upon the sale of long-term equity investments carried at cost, the cost of sale is calculated using the moving-average method, with gains or losses included in current earnings. Long-term fund investments for subsidiaries in the asset management business are recognized at acquisition costs. Considering the uncertainties arising from the collectibility of non-performing loans, based on prudence principal, investment gains and losses are recognized using the cost recovery method. If the impairment in the value of investment is other than temporary and the recovery of the carrying amount is deemed unlikely, loss on investment is recognized currently

17 Bond investments are classified as long-term bond investments if the Company intends to hold these investments until they mature. Such investments are reported on the financial statements at cost. The difference between the bond s face value and cost is amortized over the period when the bond is outstanding using the effective interest method. Upon disposal, the weighted-average method is used to calculate gain or loss. It should be stated if long-term bond investments are related to repurchase agreements or if they have any restrictions and limitations. Real estate investments are carried at cost. If the impairment in value is not temporary suggesting that the recovery of the carrying amount is unlikely, an investment loss is recognized in the current year. (g) Financial assets securitization Under the Regulations for Financial Assets Securitization, the Company s banking subsidiary, with the assistance of a trustee securitized its financial assets for the purpose of offering asset-backed securities in the form of related beneficiary certificates through a special-purpose trust. Because the banking subsidiary surrendered its rights and control on these securitized financial assets, such financial assets are no longer recognized on its accounts, and the gain or loss from securitization is recognized thereon, except for the retained interests in the form of subordinated seller certificates necessary for credit enhancement, which are classified as other long-term bond investments because those certificates do not have quoted market prices. The gain or loss from securitization of the financial assets is determined based on the difference between the proceeds from securitization and carrying value of the securitized financial assets. The cost of each class of asset-backed securities which is determined based on the previous carrying value of the securitized financial assets, is allocated in proportion to the fair value of each class of the asset backed securities and the retained interests on the date of transfer. Because the securitized financial assets do not have a quoted market price, the fair value of each class of the asset-backed securities and the retained interests are evaluated based on the present value of future cash flows considering the expected credit loss rate, prepayment rate, and discount rate on the financial assets. The cash receipts of subordinated seller certificates from the trustee are accounted for using the cost recovery method. On the balance sheet date, the fair value of these certificates is evaluated based on the present value of expected future cash flows, and the resulting losses (if any) are recognized as current losses. (h) Premises, Equipment, and Depreciation Premises and equipment are stated at cost or cost plus incremental value from revaluation. The incremental value of land is adjusted using the Government Announced Price. Major additions, improvements, and replacements are capitalized, while maintenance and repairs are charged to current earnings. Interests incurred in the acquisition of premises until they are ready for their intended use are capitalized as part of the acquisition costs

18 Pursuant to the regulations set forth by the Paraguay government, the local branch in Paraguay (dissolved in 2005) revalues its assets monthly based on the government announced revaluation ratio, effective from the second year of the branch s operation. Depreciation is computed using the straight-line method over the government prescribed useful lives. Premises and equipment still in use after their original estimated useful lives may be depreciated continuously over their estimated remaining useful lives. Useful lives of major premises and equipment are as follows: Buildings and premises Transportation equipment Miscellaneous equipment 10 to 56 years 3 to 6 years 3 to 10 years (i) Amortization Capitalized software expenses are amortized over a period of 5 to 10 years. (j) Intangible Assets Goodwill resulting from the merger by the Company s banking subsidiary is amortized over 5 years using the straight-line method. Cash-generating units relate to goodwill is tested for impairment in a fixed period each year. An impairment loss is recognized when the recoverable amount is less than the carrying amount. Impairment losses can not be reversed once an impairment loss has been recognized. The differences between original investment and net equity worth, which is not plausible to analyze the underlying causes, upon consolidation these differences are reflected as intangible assets and amortized equally over twenty years. (k) Assets Impairment Commencing from the first quarter of year 2005, the Company and its subsidiaries adopted SFAS No. 35 Impairment of Assets. In accordance with SFAS 35, unless inapplicable, the recoverable amount (individual assets or cash generating units other than goodwill) of an asset is estimated and compared with the carrying amount whenever there is an indication that the asset may be impaired. An impairment loss is recognized when the recoverable amount is less than the carrying amount (higher of fair market value and value in use). For assets other than goodwill, reversal of impairment loss is recognized when the recoverable amount of the asset has increased from its prior period estimation, the carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods

19 (l) Foreclosed Properties Foreclosed properties received are stated at estimated net realizable value, and any difference from the nominal value of the original claim is reflected as a credit loss. On the balance sheet date, if the foreclosed properties are still unsold, their net realizable values are reassessed. If there is sufficient evidence indicating that market value is lower than book value, the difference is recognized as a current loss. Gain or loss on disposal of foreclosed properties is accounted for under a recovery of doubtful accounts. (m) Convertible Bonds Due to the inseparability of the conversion option and debt elements, convertible bonds are stated at the total issue prices on issuance day. The direct and necessary costs of issuing convertible bonds are recognized as deferred expenses and amortized using the straight-line method over the term of the bonds or over the period from issuance date to expiry date of the put option, whichever is shorter. If repayment occurs prior to maturity, the remaining unamortized deferred expenses are recognized as current expenses in proportion of early redemption. The redemption premium of puttable convertible bonds, which represents the difference between the specified put price and par value, is amortized using the interest method and is recognized as the liability and interest expense over the period from the issuance date of the bonds to the expiry date of the put option. When bondholders exercise their conversion rights, the unamortized issue costs, redemption premium, and par value of the convertible bonds are converted into the common stock exchange certificates or the capital stocks in the amount of par value, while the excess amount were recorded into capital surplus. (n) Retirement Plan The Company s domestic subsidiaries maintain and fund a retirement plan covering all regular employees. Payments of pension benefits are calculated based on the employee s average monthly salary for the last six months prior to approved retirement and base point (b.p.) entitlement. The b.p earned by each employee is based on 2 b.p. for the first 15 years of service and 1 b.p. from the 16 th year and thereafter. Under the retirement plan, the pension benefits obligation will be fully compensated by the Company s domestic subsidiaries

20 The Labor Pension Act of R.O.C. ( the Act ), effective from July 1, 2005; adopts a defined contribution pension plan. In accordance with the Act, employees of the Company s domestic subsidiaries (who were hired before July 1, 2005) may elect to be subject to either the Act and maintain their seniority before the enforcement of the Act, or the pension mechanism of the Labor Standards Law. Employees who are hired by the Company s domestic subsidiaries after July 1, 2005, are required to be covered by the pension plan as defined by the Act. For employees subject to this Act, the Company s domestic subsidiaries is required to make monthly cash contributions to the employees individual pension accounts at the rate of not less than 6% of the employees monthly wages and deposit the contribution in a personal retirement benefit account. However, the employee retirement plan maintained by the Company s domestic subsidiaries has not yet been amended to conform to this Act. Under SFAS No. 18 Accounting for Pensions, an actuarial valuation of a pension asset or liability is performed on the balance sheet date, and a minimum pension liability is recorded in the financial statements based on difference between the accumulated benefit obligation and the fair value of plan assets. Net periodic pension cost recognized in accordance with SFAS No. 18 includes the current service cost, net transition asset or obligation, prior service cost and unrecognized gain (loss) on a pension plan which is amortized on straight-line basis over the expected average remaining service period of 15 years of the employees in accordance with the rules set by the SFB. The Company s domestic subsidiaries contributes monthly no less than 2% of gross salary to the employee pension fund which is deposited into a designated depository account with the Central Trust of China. Pursuant to the Act, the Company s domestic subsidiaries also contribute cash at the rate of 6% of gross salary of each employee to the Council of Labor Affairs. This contribution is recognized as pension expenses for the current period when the contribution is actually made. The pension expenses for foreign subsidiaries will be contributed based on the regulation stated by local government. (o) Bills and Bonds Sold Under Repurchase Agreements If bills and bonds are sold under repurchase agreements in which beneficial interests and risks are not transferred within the transaction period, the transactions are treated as financing transactions. When such bills and bonds are sold, bills and bonds sold under repurchase agreements are recognized based on sale prices. The difference between the sales price and repurchase price is recognized as interest expense. (p) Guarantee and Loss Reserves For subsidiaries engaged in banking, bills and securities business, guarantee and loss reserves are provided in accordance with the regulations under its Authorities, and were accounted as expense in the current period

21 (q) Derivative instruments (i) Forward contracts Foreign currency-denominated assets and liabilities of foreign exchange forward contracts are recorded in New Taiwan Dollars and translated at exchange rates in effect when the transactions occur. Gains or losses due to exchange rates differences at maturity are included in current earnings. On the balance sheet date, unsettled positions are adjusted at the forward exchange rate, with differences reflected as current gains or losses. Accounts receivables and payables from forward contracts are offset on the balance sheet date, with the balance reflected either as an asset or a liability. (ii) Non-Delivery Forward contracts ( NDF ) Because there is no physical transfer of principal in non-delivery forward transactions, only memorandum entries of notional principals are made on the contract date. On settlement, gains and losses from differences between the spot and contract rates are included in current earnings. Unsettled positions on the balance sheet date are adjusted at forward rates for the remaining contract period, with differences recognized as gains or losses. (iii) Foreign Currency Swaps Memorandum entries of notional principals are made on the contract date for foreign currency swaps. On the balance sheet date, forward accounts receivables are offset against payables, with the difference reflected either as an asset or a liability. Unrealized gains and losses from unsettled positions are computed based on the differences between contract and prevailing rates. On settlement, gains and losses due to the differences between spot and contract rates are charged to current earnings. (iv) Cross-currency Swaps Memorandum entries of notional principals are made on the contract date for cross-currency swaps. Forward accounts receivables are offset against payables on the balance sheet date, with the difference reflected either as an asset or a liability. For trading swaps, gains or losses on the differences between the present and market value of principal and interests are recognized as unrealized gains or losses. For non-trading swaps, interest is accrued based on contract terms and principal repayment period, with interest revenue and expense recognized in the same period that the hedged items affect earnings